The Surprising Business of Life Insurance Policies

Are you worth more dead than alive? That’s the premise behind this fascinating New York Times Magazine piece, which goes into depth behind life insurance policies.

First, the author drives one point home:

Selling your life and selling a house have more in common than you’d think. The seller puts a listing on the market. Prospective buyers do research and get inspections; there are offers and counteroffers until the seller accepts a bid. The seller doesn’t literally peddle his own life, of course, but his life-insurance policy. The distinction is in many ways moot, however, as the sales value is inextricably linked to a cold-eyed estimation of how much longer the seller has to live.

There are many, many reasons why selling your own policy can be a bad idea:

For all the supposed benefits, settlements still strike many people as creepy. They invert the traditional incentives of life insurance. Insurance companies have always had an interest in you, the policyholder, living as long as possible so that they can collect more premiums. Generally, you also want to live a long time, for obvious reasons. But a settlement means someone hits the jackpot when you die, and the sooner that happens, the more money that person makes.

The investors who buy policies from others must be diligent (even if what they are doing is unsympathetic):

Life-settlement investors, like those in other sectors, crave timely information about their holdings, and the key metric for predicting portfolio performance is the health status of the policyholders. To acquire this sensitive information, Fred says a Vespers representative would call and question the policyholders — or their adult children, nurses and doctors — as often as quarterly. He would then receive tracking reports summarizing what the company learned.

Much of what I’ve read in the NYT piece I’ve read previously, in different concoctions, at other sites. So the biggest takeaway from the piece, for me, was near the end:

Back in 1921, a Stanford University psychologist, Lewis Terman, selected 1,528 kids for a study on what demographic and psychological factors enabled students to excel, in both their early years and later in life. The children were regularly assessed even as they grew into adults, got jobs and had families. After Terman’s death in 1956, the project was taken up by other researchers, who continued tracking the participants all the way into the 21st century. That the study hadn’t been designed to analyze longevity scarcely mattered to Friedman: here was a large group of people who had undergone standardized assessments from age 11 till death. Friedman and his colleagues exhaustively mined the Terman data for statistically valid correlations between the “psychosocial” profiles of the participants and how long they lived. “Surprisingly, the long-lived among them did not find the secret to health in broccoli, medical tests, vitamins or jogging,” Friedman wrote in his 2011 book “The Longevity Project.” “Rather, they were individuals with certain constellations of habits and patterns of living.”

Friedman’s findings buck much of the conventional wisdom on longevity. For instance, the cheerful study participants were less likely, on average, to live to a ripe old age than the more serious ones, in part because happy-go-lucky people are prone to “illusory optimism,” meaning they underestimate health risks and are less likely to follow medical advice. Highly sociable people, on average, did not live longer than less gregarious ones as is commonly believed, because they tended to drink, smoke and party more. Over all, Friedman found a longevity edge for the successful nerds of the world, the scientist types over lawyers and businesspeople. “The findings clearly revealed that the best childhood personality predictor of longevity was conscientiousness — the qualities of a prudent, persistent, well-organized person — somewhat obsessive and not at all carefree,” Friedman wrote.

Sounds like it’s good to be a nerd!

But really, if this topic is new to you, I suggest reading the entire piece. The topic is macabre, but it’s quite fascinating.

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